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Sam Zell Is Entitled to Option on Archstone, Lehman Judge Says

Lehman Brothers Holdings Inc. lost a bid to block Bank of America Corp. and Barclays Plc from giving Sam Zell’s Equity Residential an option to buy 26.5 percent of Archstone when a judge said Zell was entitled to the option.

Bankrupt Lehman tried to block the deal, saying it would be forced to pay more than the $2.6 billion it planned for the banks’ 53 percent stake in Archstone. Lehman may be insolvent, yet it is “cash-rich,” U.S. Bankruptcy Judge James Peck said in a court hearing yesterday in Manhattan. Lehman and its affiliates had $27.2 billion of cash and investments on Nov. 30, according to filings.

Peck said he assumed the Zell company would bid about $1.4 billion for half of the banks’ stake, because if Lehman matches his offer, Equity Residential would get a so-called breakup fee in compensation.

The banks’ deal with Zell is really “a disguised sale of 100 percent of the banks’ stake to Lehman,” designed to get a good price, Peck said. “I know it.” However, he said, the Zell company is entitled to exercise its option, denying Lehman’s request for a preliminary injunction.

Peck said he agreed with the banks, which argued that the fight over Archstone “is simply about money.” Lehman wouldn’t be immediately harmed if the deal went forward, he said. Peck said he sided with the Zell company, which argued it would be harmed if Lehman blocked the deal because it had spent time and money on the investment, and would end up with nothing.

The judge didn’t rule on the merits of Lehman’s case, said Jeff Fitts, co-head of Lehman’s real estate division.

‘Breached’ Obligations

“We continue to maintain that BofA and Barclays breached their obligations to the estate and are pleased that the court noted that both banks have affirmatively waived any limitation on monetary damages the estate may seek as a result of their actions,” Fitts said in an e-mailed statement.

Lehman, which has said it wants to sell Archstone for $6 billion to help pay creditors, is first seeking to gain control by buying the banks’ stakes. Zell’s Chicago-based company is Archstone’s biggest rival in the apartment business, referred to by Peck as “the elephant in the room.”

Archstone is Lehman’s biggest real estate asset. Lehman currently owns 47 percent. Its move to buy the first half of the banks’ stake is “on the court calendar” for Jan. 11, Fitts said.

Before ruling, Peck asked London-based Barclays and Charlotte, North Carolina-based Bank of America to confirm that Lehman was entitled to a refund if a judge determined that it had overpaid for their stakes. Lawyers for both banks stood up and confirmed that was the case, according to an agreement.

Liquidation Plan

Lehman is embarking on a $65 billion liquidation plan after three years in bankruptcy court. After agreeing to pay the banks $1.3 billion for 26.5 percent of Archstone, Lehman asked Peck to rule that it has the right to take Zell’s option to the rest of the banks’ stake at the same price.

Joseph Frank, a lawyer for Barclays, told Peck that the banks have a right to sell their Archstone stakes at a market price. If Zell values the second piece of their holding at more money, Lehman should match his offer, he said.

Lehman sued the banks on Dec. 15 for breach of contract, saying they colluded to sell a stake to Zell’s company, Archstone’s “largest competitor.” As part of the suit, Lehman asked Peck to block the deal with Zell.

Equity Residential, with a minority stake, could use its leverage to gain all of Archstone, so Lehman would have to defend itself by buying the stake he bid for, Lehman’s lawyer, Paul DeFilippo, said yesterday.

Leveraged Buyout

Zell’s Equity Residential, an investor in multifamily housing, took an option to invest in Archstone because it shares the view that there is value in the apartment company, even if its estimate is $1 billion less than the $6 billion valuation of Lehman, Craig White, a lawyer for Equity Residential, told Peck.

The Zell company originally bid for all of Archstone and lost because of the $1 billion difference with Lehman over values, he said.

Archstone, which Lehman acquired in a $22 billion leveraged buyout with Tishman Speyer Properties LP, has ownership interests in hundreds of apartment developments from Washington and New York to San Francisco. Lehman and the banks made loans, which they later converted to equity after Archstone faltered in the 2008 credit crisis.

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The complaint is Archstone LB Syndication Partner LLC v. Banc of America Strategic Venture Inc. (In re Lehman Brothers Holdings Inc.), 11-02928, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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